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Good morning! It's Tuesday, December 26th. Today we’re breaking down Nubank, which popularized digital banking in South America and generates $2B annually!

THE FEATURE

Nubank's $38B Triumph: Spreading Digital Banking to South America

South American banking, until very recently, was notorious for high fees, poor service, and little innovation. 

That all changed in 2013 when David Vélez launched Nubank, currently the world's largest neobank that serves 89.1M clients and generates ~2B in revenue annually!

The Founding Story

In 2012, David Vélez was a partner at Sequoia Capital and moved to Brazil to expand the venture capital firm's reach. However, the expansion attempt ended before it truly began. 

Shortly after relocating, Sequoia Capital abandoned its Brazilian investments in light of a severe lack of human capital— the University of São Paulo had only produced 42 computer scientists the prior year. 

But Vélez saw something different. A scarcity of computer scientists and a South American banking system oblivious to new technology meant there was a massive hole to fill in the market. 

With funding from Tencent, DST Global, Founders Fund, and, ironically, Sequoia Capital, Vélez founded Nubank in 2013 to digitize the way South Americans did banking. In just 4 years, Nubank had a $1B valuation, and today, that valuation sits at a stunning $38B!

 So, What’s the Business?

Like traditional banks, Nubank generates revenue from interest in fees associated with credit cards, personal loans, and premium financial services. 

However, as a neobank that operates exclusively online, it is far more profitable than competing traditional banking systems— Nubank's latest third-quarter earnings report showed a stunning $303M in profits!  

In the traditional banking model, growth comes from opening more branches and recruiting more employees, which increases overhead costs. In contrast, Nubank doesn't have any physical branches, and far fewer employees are needed to support new growth (Nubank employees are 20X more efficient than traditional banking staff).

How They Win: Guiding Long-Term Savings through Caixinhas

Nubank's mission has always been to bring modern banking tools to South Americans and help them succeed financially. Last year, they launched Caxinhas, "little boxes," to help customers save towards their goals, and it's seen wide adoption.

Caixinhas are digital savings pools that Nubank clients can invite friends and family members to join. Each Caxinha is tied to a specific end goal, such as purchasing a home or funding a student's college tuition.

Before Nubank, most Brazilians only used Poupanças, "savings accounts," because they felt safe. Through Caxinhas, Nubank customers are educated on how savings accounts lead to long-term losses due to inflation and are guided on how to perform safe investments to achieve their financial goals.

When a Caixinha is created, it provides a list of investment opportunities that best fit the customer's goals. To make returns and goal progression tangible, Caixinhas function as mini portfolios, each with its own assets and yields.

Key Observation: Tangibly Address Consumer Pain Points

Traditional South American banks had done nothing to help their customers learn the value of investing and make it accessible and intuitive. With financial services like Caixinhas, Nubank provides clear guidance on how its customers can better their economic standing no matter their income level. 

As a result of this altruistic financial guidance, Nubank customers are fanatically loyal and evangelize the utility of digital banking to their friends and family, resulting in the widespread use of Nubank today. 

In other words, Nubank's rapid growth came from using a virtuous cycle model.

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